Recognising and categorising insurers own funds
Produced in partnership with Nicholas Thompsell, Partner of Fieldfisher LLP
Recognising and categorising insurers own funds

The following Financial Services guidance note Produced in partnership with Nicholas Thompsell, Partner of Fieldfisher LLP provides comprehensive and up to date legal information covering:

  • Recognising and categorising insurers own funds
  • Calculating regulatory capital requirements
  • Own funds, basic own funds and ancillary own funds
  • Tier 1 items
  • Tier 2 and Tier 3 items
  • Treatment of common types of capital instrument items
  • Ancillary own funds items
  • Conclusion
  • Table 2

Calculating regulatory capital requirements

The minutiae of calculating regulatory capital requirements for insurers has always been something of a difficult area for lawyers as many elements of this require advanced accountancy and/or actuarial skills. However one area where input from lawyers is required is that of categorising capital instruments for the purposes of determining how far the capital provided by capital instruments may be used to meet at the insurer's capital requirements.

In this Practice Note we consider the various classifications applicable, and what lawyers should look for in determining how to classify different types of capital instrument.

The Solvency II regime requires insurers to hold sufficient capital (known within this regime as 'own funds') to demonstrate that the insurer has the assets and the liquidity necessary to meet its liabilities. There are two main levels of own funds requirements: the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR).

The SCR is the amount of own funds calculated to be consumed by unexpected substantial adverse events whose probability of occurrence within a year is 0.5%. A firm that fails to meet its SCR will be subject to intervention from its regulators.

The MCR is the amount of own funds calculated to be consumed by unexpected substantial adverse events whose probability of occurrence within a year is 15%. It is expected to be within a range of 25-45% of the SCR. If the MCR level is breached then a more serious and immediate regulatory intervention may be expected.

The rules for determining these requirements are detailed and complex, and are outside the scope of this Practice Note. This